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Penn National Gaming revealed on Thursday that it has struck an acquisition deal with Canada’s Score Media and Gaming.
Penn is a major US operator of casinos and racetracks. It owns five such properties outright, but rents or manages dozens more around the country. Since the legalization of sports betting in the US, it has been branching out into both that and iGaming.
Initially, it did so in Pennsylvania with its own Hollywood Casino brand. However, it acquired Barstool Sports in early 2020 and has been investing heavily in building new gambling products using that brand.
Penn acquiring Score Media is consistent with that strategy. It too is a sports media company with a much-downloaded app, called theScore, just without the “frat boy” trappings of Barstool’s products. By the same token, it could be seen as redundant, yet there are demographic, geographic and technological differences between the two that should help Penn develop synergies and avoid too much self-competition.
Jon Kaplowitz, Head of Penn Interactive, said:
“This is a significant milestone for Penn Interactive and Penn National. With the acquisition of theScore, we will have greater ability to innovate and offer a best-in-class product to our customers. Personally, I am excited to join forces with […] theScore team who have proven to be great partners and amazing thought leaders in our industry.”
The terms of the deal value Score at roughly $2 billion. Those currently holding a stake in the company will receive USD $17 in cash and 0.2398 shares of common Penn stock ($PENN) per share of Score ($SCR). The value of the latter depends on Penn’s share price, and so changes from moment to moment, but the ratio was chosen to make it close to $17 as well.
Thus, Penn is paying for the acquisition with roughly $1 billion cash, which it has on hand, and another $1 billion worth of its own stock. Current Score shareholders will end up collectively owning about 7% of the resulting company after the deal goes through.
The benefits Penn hopes to realize through the acquisition are along three basic axes: media as a customer acquisition and engagement tool, brand recognition in the upcoming Canadian market, and technological independence.
Between Barstool and Score, Penn clearly sees media as the key to building market share in the sports betting space. Unlike casino gaming or poker, sports betting isn’t a self-contained product. At minimum, bettors need live updates to follow the game they’ve wagered on. Many also want to look at stats and analysis in order to make smarter bets.
Ownership of platforms such as Barstool and theScore means instantly acquiring a database of potential sports bettors. It also provides a channel to market to them directly.
Jay Snowden, President and CEO of Penn described that aspect of the strategy:
“We are thrilled to be acquiring theScore, which is the number one sports app in Canada and the third most popular sports app in all of North America. theScore’s unique media platform and modern, state-of-the art technology is a powerful complement to the reach of Barstool Sports and its popular personalities and content.”
Penn isn’t unique in this regard, but it is pushing the strategy to a greater degree than operators. Having theScore in addition to Barstool means Penn can reach customers who are put off by Barstool’s crass image. It also positions Penn to be able to branch out into esports betting if and when that finally takes off, as it’s a goal Score Media is already working towards.
There is also a geographical component to the acquisition. The timing of the deal suggests this may in fact be the primary motivation. Canada has just passed C-218, which repeals the federal prohibition on single-game sports wagering. The bill has received royal assent, and now needs only for the Liberal government to set an official date for it to come into effect.
Although Barstool has a presence in Canada, but not nearly to the same extent as in the US. For instance, the Barstool Canada Twitter account has just over 6000 followers, compared to 3 million for the main, US-facing account. On Instagram, it’s 165,000 for Barstool Canada compared to 11 million for the main account. Conversely, theScore is the most downloaded sports app in Canada, ahead of even those of the major sports networks, TSN and Sportsnet.
As a country, Canada is much smaller than the US. However, C-218 makes it possible, and likely, that all the provincial lotteries will launch regulated sports betting in short order, unlike the US, where states still need to legislate it individually. Taken as a whole, Canada’s population of about 38 million is comparable to California’s, making it bigger than any single state currently offering legal sports betting.
There may also be a casino angle. TheScore does have a single US online casino in New Jersey, but it was a late arrival to that crowded market. It will have far better chances in Ontario’s upcoming privatized iGaming market. There, it will be able to launch at the same time as its competition, and enjoy home field advantage.
Having Score Media under its roof may make things easier for Penn’s other brands as well. It has a talent pool of over 200 employees with local market knowledge, ripe for internal hiring.
Another key strategy for many sports betting and iGaming companies is to try to bring the entire tech stack in house. It’s an industry that historically tends to involve a lot of business-to-business deals. Smaller brands, and even some large ones, often rely on white label suppliers for some or all of their software.
Now, more and more operators are seeking to cut that umbilical. For one thing, ownership of the technology saves costs in the long run by eliminating recurring payments. It also provides greater control and reliability, and opportunities for product differentiation.
DraftKings is perhaps the poster child for that strategy, following its acquisition of SBTech last year. Score Media is a much smaller company than SBTech in terms of employees. However, it has a high density of talent. Here too, we can expect to see some internal hiring or reshuffling to help out Penn’s other brands.
Snowden said as much himself:
“Importantly, the transaction provides us with a path to full control of our own tech stack. theScore has developed a state-of-the-art player account management system and is finalizing the development of an in-house managed risk and trading service platform. This should lead to significant savings in third party platform costs and allow us to broaden our product offerings – providing the missing piece for operating at what we expect to be industry leading margins. In addition to the synergies, we’ll be gaining access to theScore’s deep pool of product and engineering talent and data-driven user analytics which will help drive our customer acquisition, engagement, retention strategies and cash flows.”
This is all good news for Penn and its investors. However, the price tag attached to the deal amounted to a huge windfall for Score shareholders. A little math shows it values the company at double its prior share price.
Score’s stock hit an all-time high of CAD 56.70 (approx. $45.10 in US dollars) in mid-February this year, around the time that C-218 passed in the House of Commons. That excitement quickly ebbed, however, and the stock has spent much of the last few months below $20.
The terms of the deal, however, now pin Score’s price quite closely to Penn’s. If the market were perfectly efficient and the deal 100% guaranteed to go through, one share of Score would have to be equal to exactly $17 plus 23.98% of the value of a Penn share. As of this writing, that would be $34.31, or CAD 43.08.
The stock hasn’t quite hit that mark, currently trading at $41.97, a week over week increase of 123%. This is normal, as there’s always some chance that a deal falls through or is blocked by financial regulators before closing. The closer we get to the closing date and the more certain the deal looks, the closer the two stocks should track one another as institutional investors engage in what’s known as “merger arbitrage,” capitalizing on those market inefficiencies.
Penn investors seem to have been of two minds about the deal. The immediate response to the news was a small sell-off, causing a drop of about 5% in its share value. It rebounded almost immediately, however, and closed at $72.26 on Thursday, a gain of 9% over the previous day’s close.
It will be interesting to watch how Penn juggles the two brands and the two markets. The media brands can co-exist, but there’s more redundancy when it comes to Barstool Sportsbook and theScore Bet. The natural strategy would be to use Score’s brand in Canada and Barstool in the US.
However, theScore Bet already operates in four US states. Interestingly, the only one of these which overlaps with Barstool currently is Indiana. Barstool Sportsbook is also available in Pennsylvania, Michigan and Illinois, while theScore Bet additionally serves Iowa, Colorado and New Jersey.
Once the two brands are using the same technology, it would be easy enough to unify them by rebranding theScore Bet’s US operations. This is what Caesars has just done with William Hill, for instance. Alternately, it could maintain the current situation, where both brands are in use but in mostly different states. Or, it could try to juggle both in as many states as possible. Flutter is currently facing a similar dilemma with Fox Bet, which it picked up as part of its acquisition of The Stars Group last year.
We may only get an indication of its plans in that regard after the takeover is complete. That’s expected to happen in the first quarter of 2022. In the meantime, Penn will surely be focused on expanding the Barstool brand in the US, while Score will be waiting impatiently for Canadian regulated sports betting to get off the ground.